An economic forecast is a prediction about the future state of an economy. Having a good economic forecast can help everyone from businesses to government officials make informed decisions about what to do next.
To create a forecast, you need two things: data and a model. Obtaining historical data about key economic variables is one of the most important parts of forecasting. You can find a lot of this information in print and online sources like the Federal Reserve’s FRED database or Eurostat. This data can be used to determine relationships between independent and dependent variables using mathematical methods like regression analysis.
Once you have the data, you need a model to predict what will happen in the future. This is based on the historical relationship between dependent and independent variables, such as the relationship between GDP growth and the unemployment rate. It also takes into account the impact of unexpected events on the variable.
A good economic forecast should take into consideration both lagging and leading indicators, such as inflation, business investment and housing starts. Inflation is a lagging indicator that measures the change in prices paid by consumers over time, while business investment and housing starts are leading indicators that look at trends over shorter horizons.
McCracken said that a big reason why many economic forecasts are wrong is because of surprises. Unexpected events such as political upheaval or natural disasters can throw off established patterns and make predicting the future difficult. Trying to account for this risk requires some judgment, but you can use mathematical models and other economists’ work to make educated guesses about what will happen in the future.